Microsoft edged higher in early trading after a pair of Wall Street analysts revisited their ratings and prices targets on the world's third biggest tech company ahead of its first quarter earnings report later next week.
Microsoft (MSFT) , which lost its place as the world's second-largest company by market value to Nvidia (NVDA) earlier this month, has underperformed the Nasdaq for much of the second half of the year, rising around 5% since late April compared to an 18.3% gain for the tech-focused benchmark.
The group's late-summer performance, meanwhile, was marred by a mixed set of fiscal fourth quarter earnings that included weaker its flagship cloud division and a big jump in AI spending plans as it looks to monetize its investment in the new technologies over the coming year and beyond.
The time gap between Microsoft's spending, which is expected to grow by 36% over is current fiscal year from the $55.7 billion tally in 2024, and the likelihood of revenue gains from the infusion of AI technologies across its product suite, has weighed on shares and soured some investor sentiment in the bellwether stock.
Fourth quarter revenues from Microsoft's Azure cloud division, its biggest growth driver, rose 29% but missed Street forecasts, while overall Intelligent Cloud revenues rose 19% to $28.52 billion, again shy of analysts' estimates.
Mag 7 laggard
"Microsoft shares have lagged in the past quarter as investors wrestle with increasing capex amid underwhelming Azure growth (due to capacity constraints and macro headwinds) and slowing EPS growth," said Citigroup analyst Tyler Radke in a note published Wednesday. "This creates a mixed set-up heading into [its fiscal first quarter earnings."
Analysts expect Microsoft to post a bottom line of $3.06 per share for the three months ending in September, up 2.3% from the same period last year, with revenues rising 14.1% to $64.5 billion.
Radke, who carries a 'buy' rating on the stock while trimming his twelve-month price target by $3, to $497 per share, sees improving earnings ahead after surveying system integrations, Microsoft resellers and chief investment officers in the tech sector.
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"We expect to gain more clarity on 2H Azure/AI demand trends and receive reassurance regarding capex/returns," Radke and his team wrote. "After a fresh look at our estimates, factoring in the new re-segmentation, we have modestly lowered our FY26/27 revenue and EPS estimates by ~2 points but remain slightly above consensus."
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"We recommend buying on the recent pullback, as we expect investor sentiment to turn more positive following the Q1 earnings report, with a reacceleration in Azure growth and EPS growth in the second half of the fiscal year," he added.
Loop Capital analyst Yun Kim, who also reiterated his 'buy' rating on Microsoft and carries a $500 price target on the stock, expects "solid" first quarter earnings amid a modestly improving IT spending environment and cloud computing plans that are likely to materialize in the coming year.
Microsoft shares were marked 0.3% higher in premarket trading to indicate a Wednesday opening bell price of $428.85 each.
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